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<<<< BUSH'S HANDS ARE TIED OVER FLOOD OF CHINESE IMPORTS
Irwin Stelzer
Free trade and free elections do not always coexist peacefully. In an economy in which workers find jobs hard to come by, employers find their pricing power sapped by foreign competition. The 2004 election campaign is now on fast forward and free trade is likely to find itself among the badly wounded.
When the gaggle of Democratic candidates appeared before the AFL-CIO trade-union conference last week, vying for the dollars and foot soldiers so important in the primary campaign, most promised to veto any new free-trade agreements. In a display of protectionism red in tooth and claw, the steelworkers' union declared that President George Bush's 30 tariff on imported steel did not satisfy its appetite for protection. It denounced Bush and promised to back any Democrat who is more protectionist.
Meanwhile, the president's economic team was touring the nation's hinterland to announce that the economy is a coiled spring, about to unleash a full-blown recovery on the nation. Treasury secretary John Snow, commerce secretary Don Evans and labour secretary Elaine Chao picked their venues carefully, holding their meet-the-citizen sessions in the plants of some of America's most successful companies, such as Harley-Davidson, the motorcycle maker.
Imagine their surprise when most of the questions were about the flight of jobs to China. When the Bush administration persuaded China to make the reforms necessary to secure membership of the World Trade Organisation (WTO) and enter the global trading system, it was thinking of the vast potential market for American goods. Now that the annual trade deficit with China is running at $100 billion (£62 billion), almost twice as high as the deficit with Japan, Republicans and Democrats are vying to persuade voters that they are the ones who will be the hard men in tackling this latest "yellow peril".
The dirty little secret is that many of America's biggest companies, among them General Motors, have invested heavily in China, are prospering mightily there, and prefer the status quo to the re-evaluation that is high on the agenda of smaller textile, toy and clothing companies. But the corporate giants are keeping a low profile so as not to be pilloried for defending a system that most Americans think is costing us jobs, and experts know is resulting in widespread theft of intellectual property.
It is certainly true that China is subsidising its exports by keeping state-owned factories in business and, more important, by pegging its currency, the renminbi, to the dollar. So when the dollar fell, making imports from most countries more expensive in the United States, and exports of made-in-America goods and services cheaper, China was unaffected: its currency moved downward with the dollar.
Experts estimate that if the Chinese authorities ended the dollar peg, the renminbi would appreciate by anywhere from 10 to 40. But more than a minor revaluation is unlikely: the Chinese leadership believes it cannot survive the collapse in employment that would follow a big fall in exports.
The problem for the administration is that trade with China is not an issue that can be treated in isolation. For one thing, China is the only country with the power to bring North Korea to the table to negotiate the surrender of its nuclear ambitions. Bush has to consider whether it would be sensible to forfeit Chinese goodwill in a matter of such overwhelming importance to protect American producers of textiles and toys from Chinese competition.
Second, the administration knows that it must produce a growing economy by the first quarter of next year if it is to be assured victory in the November 2004 elections. One thing that can derail the recovery now under way is a further and rapid rise in interest rates. Here, China has an important role to play.
The $120 billion it has piled up by selling more to America than it buys from us is being used to buy Treasury notes and bonds. They send us goods, we send them dollars, they return the dollars, in exchange for which we send them our Treasury's lOUs. That keeps the price of American debt securities up and, on the flip side, interest rates down.
If the Chinese authorities get cranky and stop buying Treasury notes, or, worse still, start dumping them, soaring interest rates could wreck the market for new homes, end the refinancing of mortgages that has put billions into consumers' hands, discourage new business investment, and produce the voter nervousness that gave the elder Bush a White House lease with all too short a date.
But even if Bush concentrates on the trade statistics alone, he will have some difficulty in deciding what to do. Much of what America imports from China is produced in plants owned by US companies. And some of the products shipped from China, and counted in the statistics, are partly manufactured in other Asian countries, and merely finished in China and shipped from there.
In this as in other matters involving trade, the few who are hurt by imports organise to make their voices heard in Washington, while the millions of consumers who benefit from cheaper trainers, T-shirts, cars and other products -- 10 of the trade deficit is accounted for by the $10 billion worth of Chinese goods bought by Wal-Mart -- don't recognise the relationship between free trade and their ability to get more bang for their bucks.
If the president is not to deviate further from his free-trade philosophy, he will have to hold off the few, who will be angry, in the interests of the many, who will neither know nor appreciate his efforts on their behalf. That is a lot to ask of a politician.
Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute
Sunday Times 10 August 2003 >>>>>
Keith Hudson, 6 Upper Camden Place, Bath, England
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